Accessing your pension early due to ill health is a step many don’t anticipate needing to take. However, for individuals facing serious or terminal medical diagnoses, it can offer essential financial help.
Whether you’re navigating this process for yourself or researching on behalf of a loved one, understanding the rules, processes, and implications can help you make informed decisions about your pension fund. In this guide, we’ll walk you through:
- The options for accessing your pension early if you find yourself facing serious ill health or a terminal illness.
- The criteria for eligibility.
- Key considerations, including scams to be aware of.
This article focuses on workplace and personal pensions, and is general information, not tailored financial advice. Contact your existing pension provider directly to ask them about your options and their policies.
Jump straight to:
- What qualifies as ill health for early pension access
- Defined benefit pensions vs defined contribution pensions
- Ill-health early retirement
- Terminal illness and pension access
- Finding out how much your ill-health pension would be
- Considerations
- Planning ahead: making your pension easier to manage and access
What qualifies as ill health for early pension access
Although it isn’t a decision to take lightly (keep in mind during this read that there are both advantages and disadvantages to withdrawing from your pension early due to a serious health condition), you may be eligible to access your workplace or personal pension early.
Here’s what qualifies for both workplace and personal pensions:
- Early retirement for those experiencing ill health: Those unable to work due to a permanent condition (mental or physical), but without a specific life expectancy requirement.
- Accessing a pension for those facing a terminal illness (also known as ‘serious ill health’): Those with a life expectancy of less than 12 months, often with more favourable tax treatment and faster processing times.
It’s worth noting that qualifying for early ill health payments will be provider-dependent, as not all providers offer both types, and they set the criteria for early access in ill health. To see whether you qualify, reach out to your provider to find out what circumstance and evidence is needed.
Can I claim State Pension early due to ill health?
No, the State Pension cannot be accessed earlier than your State Pension age, even in cases of serious or terminal illness. You can check your State Pension age using the government’s State Pension calculator.
However, there may be alternative benefits available depending on your circumstances.
- For people who have a terminal illness, see the government website for these options (sometimes called ‘special rules for end of life’): www.gov.uk/benefits-end-of-life
- For those unable to work, it may be in your interest to check the calculator from MoneyHelper: www.moneyhelper.org.uk/en/benefits/benefits-calculator
Defined benefit pensions vs defined contribution pensions
Ill-health early retirement
Eligibility Criteria
The general eligibility for ‘ill-health’ early retirement would be:
- You must be unable to work due to a permanent mental or physical condition.
- There is no requirement to have a specific life expectancy.
(Please note, this is as accepted by HMRC, though this may vary in specific criteria between providers)
Medical Evidence
Your pension provider will require medical evidence, such as a doctor’s certificate or medical report, confirming the permanence of your condition and its impact on your ability to work.
Tax Treatment
- Usually, the first 25% of your pension pot would be tax-free.
- The remaining amount is taxed at the relevant income tax rate.
Application Process
- Contact your pension provider to start the process.
- Submit the required medical evidence and any forms provided by your scheme; they should then be able to give you a timeline of what to expect next.
Terminal illness and pension access
For those with a life expectancy of less than 12 months, the process for accessing pensions is often more streamlined.
Eligibility Criteria/medical evidence
Medical certification of the terminal diagnosis (confirming a life expectancy of under 12 months).
Tax Treatment
In some cases, your entire pension pot can be taken as a tax-free lump sum. Check with your provider about this.
Application Process
Many pension providers prioritise terminal illness applications for quicker access to funds, meaning faster processing times for you.
Dependants’ Benefits
While you’re looking into your policy, you can take the opportunity to check any benefits for your spouse, civil partner, or children are protected under your scheme’s rules.
Finding out how much your ill-health pension would be
The amount you’ll receive depends on:
- The type of pension you have (defined benefit vs defined contribution).
- The rules of your pension scheme.
- Your life expectancy (for terminal illness claims).
Contact your pension provider directly to get a clear view of your ill-health retirement benefits.
Considerations
Beware of pension scams
Be careful during this turbulent time, as your pension could be at risk of scammers. Some red flags and things to be mindful of are:
- Watching out for cold calls — it’s unlikely a genuine pension provider would be contacting you in this way.
- Being alert to offers that sound too good to be true.
- Checking that you’re using a firm regulated by the Financial Conduct Authority (FCA).
- Always stay alert, as it’s unlikely your pension provider will give you direct financial advice about transferring/withdrawing your pension, so be aware of anyone who tries to force or pressure you into making a quick decision. So, be cautious of scammers posing as your provider/anyone else who is trying to encourage you to do this.
- If you find yourself in debt and feel you need to access your pension to pay this off, MoneyHelper’s debt advice tool can help you find free, trusted debt advice (don’t let scammers take advantage of your situation): www.moneyhelper.org.uk/en/money-troubles/dealing-with-debt/debt-advice-locator
- Vigilance is key. You can report any suspected scams to Action Fraud: www.actionfraud.police.uk/
The tax implications
- Usually only 25% of your pension pot can be taken tax-free, unless your condition is a terminal illness and you’re under 75, in which case the whole amount could be tax-free (up to the ‘lump sum and death benefit allowance’). Check with your pension provider to confirm.
- Otherwise, the remaining 75% is taxed as income at the relevant income tax rate.
- Emergency tax may apply, initially.
- It’s also important to note that early pension withdrawals could affect your entitlement to means-tested benefits.
Other options to explore
- For those with a long-term illness, staying in your job I if it’s something you’re able to do might also mean you can continue saving into your pension, meaning you should have more money when you do retire. So, you may be able to explore adjusting your work arrangements (e.g. reducing your hours, asking for specialised equipment to support you, or switching to remote work, if at all possible).
- If you already have a policy in place, consider claiming critical illness or income protection insurance.
- Potentially releasing equity in your property.
- Seek advice on State Benefits (e.g. Personal Independence Payment (PIP), Employment and Support Allowance (ESA), or Attendance Allowance).
- You can also look for guidance or independent financial advice from a regulated financial adviser. For more guidance on this, check out Money Helper’s guide on ill-health retirement.
Planning ahead: making your pension easier to manage and access
To ensure a smoother process if you ever need to access your pension early:
- Know where your pensions are:
Use the government’s Pension Tracing Service to locate any old or lost pensions: www.gov.uk/find-pension-contact-details - Think about consolidating those pensions:
Combining pensions into one pot, such as a Self-Invested Personal Pension (SIPP) from Wealthify, could simplify management and access, and potentially reduce fees (for example, if the charges you are paying with your current provider are higher). - Update your beneficiary nominations: You can help ensure your loved ones are listed as beneficiaries.
- Keep your loved ones informed: Further to the point above, you could let your family members (or who you expect to be the executor of your estate) know where pension documents are stored. It may be helpful to keep this with your Last Will and Testament, and your Letter of Wishes if you have one of those, too.
Accessing your pension early due to ill health is a significant decision, but for those facing challenging circumstances, it can provide much-needed financial support.
By understanding your options, eligibility criteria, and the implications involved, you can make an informed choice that best suits your needs.
If you’re considering early retirement due to ill health, start by contacting your pension provider for guidance tailored to your specific scheme, as well as considering speaking to an independent financial adviser who has expertise in pensions.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. We would recommend you consult with a regulated financial adviser or your pension provider before making decisions about your pension.
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
Wealthify does not provide advice. If you’re not sure whether investing is right for you, please speak to a financial adviser.
Resources:
www.gov.uk/benefits-end-of-life
www.moneyhelper.org.uk/en/pensions-and-retirement/pensions-basics
